Developers Cite ‘Cost of Capital’ in Renewable PPA Pricing

Utility-scale renewable energy project developers with active projects in LevelTen’s marketplace have started to cite “cost of capital” as the main factor affecting their prices. In LevelTen Energy’s Q2 2019 PPA Pricing Index, 9% of the 33 developers surveyed named it as the number one factor. Last quarter no developer cited it.

The expiration or phase down of federal tax credits could be playing a role here, according to the company.

“Though it’s likely too early to see the direct impact on prices, as tax equity investors become a less dominant component of a project’s capital stack, other categories of equity investors will fill the gap,” said Rob Collier, vice president of developer relations at LevelTen Energy. “The expectation is that these new investors will have lower hurdle rates than costly tax equity, thereby lowering the weighted average cost of capital for projects, and ultimately pushing PPA prices down.”

The latest report covers wind and solar projects in five independent system operator (ISO) regions, including California Independent Service Operator (CAISO), Electric Reliability Council of Texas (ERCOT), Midcontinent Independent System Operator (MISO), PJM, and Southwest Power Pool (SPP). In the report, P25 refers to the most competitive 25th percentile offer price.

Additional takeaways from the quarterly report:

• PPA offer prices rose during the second quarter, but not dramatically. “Across markets, an evenly-weighted index of P25 wind and solar prices increased $0.18 per megawatt hour (MWh), or 1.2% quarter-over-quarter,” LevelTen Energy says.
• Year-over-year, prices have declined. “The P25 solar price index dropped 5% from Q2 2019 to Q2 2018, and the P25 wind price index dropped 9%.”
• Development costs increased, but so did competition. Developers surveyed said competition from other projects had the biggest effect on Q2 prices. “That’s good news for corporate buyers,” LevelTen Energy’s report said. “In addition to keeping prices lower, more competition means more projects to choose from in the market.”
• Most developers don’t anticipate dramatic price changes in 2020.
• PPAs are getting slightly shorter. “From Q1 to Q2 2019, average contract lengths decreased from 13.8 to 13.5 years for wind projects and likewise decreased from 14.4 to 14.0 years for solar projects.”

LevelTen Energy’s fifth iteration of the quarterly report can be found here.